Despite a $400 million drop in written premiums, title insurers boosted net income more than 5 percent in 2006, in part by shifting business from affiliated business arrangements to direct operations, according to a new report by consulting and financial analysis firm Demotech Inc.

At 4.94 percent, the industry’s loss ratio was slightly better than 2005, but remains near a 10-year high, Demotech said.

“All signs seem to point to a continued dampening of title industry results, but not a major collapse, suggesting a more sophisticated market better able to weather market fluctuations,” Demotech said in announcing the report’s release.

At $16.4 billion, written premiums were down $400 million in 2006. But premiums written from direct operations made up 14.4 percent of operating income — more than double the share in 2004, and the largest share in 10 years.

Writing a greater share of premiums internally reduced agent commission expenses while increasing other revenue streams, Demotech said. The shift in premium channel from affiliated businesses (ABAs) to direct operations contributed roughly $200 million towards net operating gains, Demotech said, although it remains to be seen how sustainable such gains are.

Compared to 2005, operating income for the industry as a whole was down 1.1 percent, to $17.6 billion, while net investment income was up more than 20 percent. A third of title underwriters managed a better net operating gain to total operating income ratio than they did in 2005, but 42 underwriters reported a net operating loss, compared with 27 in 2005.

Companies managing significant gains through market placement, diversification, or consolidation included:

  • Title Resources Guaranty, which boosted total operating income by more than 30 percent, to $110.3 million.

  • Guarantee Title & Trust, which expanded into six new jurisdictions to write $13.3 million in net premiums.

  • United General Title Insurance Co., which increased net premiums written by 67 percent to $332.8 million after being acquired by First American in February 2005.

At the state level, Florida is poised to surpass California as the state with the most premiums written by the end of 2007, the report predicts. Premiums written dropped almost $600 million in California in 2006 because of the slowdown in the state’s housing market.

The four largest underwriters in California — First American Title, Chicago Title, Fidelity National Title, and Stewart Title Guaranty — reported a combined reduction in policyholders’ surplus of almost $80 million in 2006, compared with an increase of $170 million in 2005. Policyholders’ surplus is a general measure of a company’s net worth.

Across all markets, 39 companies posted combined ratios of over 100 percent in 2006, compared with 24 in 2005. The combined ratio — the sum of the loss ratio and operating expense ratio — is a benchmark for determining underwriting profitability.

Top title insurers of 2006

Source: Demotech Inc.

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